Book Reviews, Business & Money, Charles
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Good Profit (Charles Koch)

Holy crap, this is a bad book. I like the Koch brothers. I agree with them politically, both philosophically and in their desire to actually punch back at liberals and change the status quo, rather than simply feeding money into the rathole of establishment politicians and tasseled-loafer conservative consultants. Their demonization by the Left is emblematic of much that is wrong with America. But this is a business book, not a book on politics. And, holy crap, this is a bad book.

What I thought this book was going to be was an exposition of how Koch Industries got where it is today. Any business that grows from very little to very much has to slash its way to the top, dealing with innumerable existential threats, internal and external. Over decades, scores of highly interesting and highly informative stories must accumulate. This, the inside story of Koch Industries, is what I thought I was going to get.

What I got instead was 250 pages of pabulum, in which incoherent ramblings and gross generalizations are used in the service of hindsight confirmation. Every aspect of Koch’s business discussed in in the book is addressed as such a high level of generality as to leave the reader understanding nothing at all about Koch Industries or how it got where it is today.

Apparently Charles Koch (the author—his brother David is referenced but not involved in the book) believes that Koch Industries has a unique business management system. It is called Market Based Management, or MBM. (I actually had to go back and look that up, it is so un-memorable. And bizarrely, in several places it appears in the book, it has a registered trademark symbol by it, which is not required under trademark law and adds nothing except pretension.) Koch attributes Koch Industries’ success to that system. But every aspect of MBM is trite, obvious, and irrelevant both to the success of Koch Industries and to running any business.

Charles Koch has fallen into a false syllogism. Premise 1: Koch Industries is very successful. Premise 2: Koch Industries uses MBM to guide its actions. Conclusion: MBM is responsible for the success of Koch Industries. This is on its face a post hoc ergo propter hoc error. In fact, MBM is dumb and could not actually be responsible for any success.

The book contains endless statements like “Koch’s reality-grounded MBM mental models, customer focus, and innovation have made us one of the largest and most successful private companies, generating exceptional long-term performance.” These tiresome statements alternate with philosophical nods to Schumpeter’s creative destruction, while ignoring it is not Pareto optimal, claiming for example that a factory girl who loses her job will, herself, have a higher standard of living as a result, which is self-evidently false. Then there are odd claims, such as that MBM is a free-market model directly analogous to a sovereign country with a free market. But nowhere is the actual success of Koch Industries shown to derive from or be related in any concrete way to these philosophical positions.

Anyway, as to the organization and substance of the book. The first third of the book is a brief, mildly interesting but neutered recitation of the history of Koch Industries. In this telling, Fred Koch started a successful oil business; in the 1960s his sons expanded into related business areas. Then they bought some big companies, like Georgia Pacific and Molex. Now they’re very big. The end (so far). The second two-thirds is about MBM.

In all of this, there is lots of rambling talk, such as how “virtuous cycles” lead to Koch “spotting new opportunities to deliver value to our customers.” There is talk about how instead of “grand plans,” Koch has a “practice of exiting businesses with limited potential for us and focusing on ones with greater potential.” None of this is wrong, but it’s obvious as advice, and none of it tells us how Koch decided to make acquisitions, what obstacles they encountered, how they overcame those obstacles, etc. No, instead, this two-bit philosophy instead magically leads to mostly good choices, good results, and “good profit” for Koch (i.e., profit generated without government handouts).

MBM itself is an incoherent five-part system of “Vision,” “Virtue And Talents,” “Knowledge Processes,” “Decision Rights,” and “Incentives.” As far as “Vision,” did you know that “to succeed in the long term, a business must innovate and improve at least as fast as its most effective competitor”? Yes, so did I. On the other hand, “Koch’s Vision is different from most because it’s focused on value creation and people.” Ummmm . . . . sure. Whatever, Charles.

“Virtues And Talents” are apparently synonymous with Koch’s “MBM Guiding Principles,” which are ten, including such exciting and original gems as “Integrity, “Value Creation,” “Customer Focus,” and “Change.” Also, it is apparently important that employees have talents, and did you know that some employees have more talents than others? Among other startling conclusions, “feedback should be designed to actually help employees improve their performance.”

In other MBM pearls of wisdom, “Knowledge Processes” need to be developed to allow measurements, because apparently everyone else but Koch uses haruspices. And “Decision Rights” must be allocated to allow good decisions, while of course avoiding overconfidence, bad framing and anchoring. Finally, “Incentives” are important, and unlike everyone else, Koch Industries attempts to execute incentives not by random guessing, but by evaluating the value created by the employee.

None of this is wrong. All of it can be found in an undergraduate level business class. None of it is remotely informative to actually running a business, much less growing a business to a giant size. It is worthless.

The reality is that building a business is a Hobbesian gutter struggle, where the key element is simply getting things done and driving forward, forward, always forward, adapting, overcoming and improvising. Nothing in MBM would be helpful to a real businessperson. Anything true in it is subsumed in what a successful businessperson is already doing. I still don’t know what the real personality of Koch Industries is. I still don’t have the slightest idea why Koch Industries has been successful. I suspect it’s because the Kochs got handed an excellent core business, struggled in ways that are not revealed in this book, got lucky in some things, and here they are today. But this book says nothing about the real story of Koch Industries. It is a waste of time.

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